The Wrath Of The Farmers

January 24, 1985|By Charles Epstein.

For more than 150 years, the function of Chicago`s commodity markets has been a mystery and source of frustration for the nation`s farmers. Recent demonstrations by the American Agriculture Movement dramatized how that mystery and frustration continue to fester in 1985.

The frustration stems from the economic hardship associated with being a farmer in a predominantly urban economy. Since 1982, more than 22,000 farms have ceased operations. The mystery, from the farmer`s perspective, is how the futures markets operate and what their role is in agricultural marketing.

For a century and a half, Chicago`s commodity markets have been the target of agrarian reformers who pointed to ``rampant speculation`` and its effects, mostly adverse, on prices farmers and livestock producers would get for their products.

AAM`s demands are a fundamental complaint about the practices of futures markets. The demands are for the elimination of short selling; trading in the physical commodity only; and prohibition of all trades ``at less than minimum price based on the true cost of production, plus a fair return on investment which equals 90 percent parity.``

These demands, presented to the heads of the nation`s largest commodity futures exchanges--the Chicago Mercantile Exchange and the Chicago Board of Trade--are an echo of complaints that go back to the period right after the War of 1812.

At that time, a rural antispeculation bias emerged based on the premise that supposed market titans acted to manipulate the prices and distort the intrinsic values of harvested crops and livestock. The supposed manipulation occurred after the farmer had committed his assets to market, when he was at the mercy of millers, feed-lot operators or other processors who determined the farmer`s final sale price and ultimate profit margin.

In addition to claims of manipulation, agrarians protested against short sales, which they claimed often lowered prices just as produce or livestock was coming to market. (Short selling is the practice of selling a commodity in the hopes of buying it back later at a cheaper price.)

This speculative short selling was something outside the control of farmers, a mysterious action they claimed often resulted in little or no profit to agricultural producers. Shortly after the War of 1812, the New York legislature enacted a law prohibiting short sales (the law was repealed 46 years later). New York`s law was the first attempt to legislate against futures markets in the U.S.

Fanned by developing agrarian and populist sentiment, the last decade of the 1800s saw a flurry of antispeculative, anticommodity legislation directed against tampering with the major cash crops of the day: cotton, wheat and corn. The origin of negative sentiment was disproportionately regional, and by about 1900 a poor understanding of the function of commodity markets and the role of speculators, hedgers and commercial interests was evident.

Legislative attempts to administer parity can be traced to 1929 and the Agricultural Marketing Act, which had a provision to limit commodity speculation and prevent or control surpluses. But administration of the act was a failure.

Agrarian legislators were defeated in attempts to curb futures markets, but in the domain of public opinion it was a stalemate. Public opinion seems to be where the outcome of this week`s demonstrations will be determined. AAM`s demands speak on behalf of the smaller farm operator who often lacks the marketing resources of his larger counterparts. From AAM`s perspective, price discovery (a key function of the futures markets) emerges as rampant speculation aimed at diminishing farm profits.

Futures exchanges are where buyers and sellers, speculators and hedgers, converge to follow their own investment strategies or intuition, in the hope of making a profit. It is here that farmers wishing to lock in a profit based on cost of production can hedge. It`s also the place where speculators, who take the opposite side of this trade, can buy the crops by following a futures or options strategy. Without speculators, who would buy the hedged crop? The government is unable to buy it all. No individual or single group has ever been able to ``corner the market`` in recent times. That leaves speculators, for better or worse, who act to lock in those prices.

Speculation about farm profits is probably as old as agriculture itself. There is rampant optimism once nature`s definite cycles become recognized. Yet ask any expert about the prospects for farm profits in 1985 and their mood will change.